Purchasing a house is a big investment and usually involves meticulous planning by the buyer in choosing the right house in the right location that fits his/her budget and needs.
Once the selection of the house is sorted, the next step would be to choose the right bank for your home loan needs.
Apart from the interest rate, tenure and customer service, you should compare the home loan repayment options that the bank/financial institution has to offer. It is important, considering the long tenure of the loan and, the significant amount that you be contributing towards the repayment every month from your income.
Here are some home loan repayment options to consider:
1. Moratorium period to delay the start of EMIs
Soon after you purchase a house, you will probably have expenses like interior decoration, repairs, registration fees, stamp duty, brokerage, etc that could eat into your salary for a few months.
Some banks or NBFCs (non-banking financial companies) allow a moratorium period to the customer for 3 to 36 months which delays the start of equated monthly installments (EMIs) towards the loan. In this period, the borrower will only be required to pay pre-EMI interest and not the installments.
The facility is generally only available to borrowers between the age of 21 to 45 years.
However, one should consider the increasing burden of EMI in later stages of life and preferably not delay EMIs for too long.
2. Increasing or decreasing EMIs
You can choose the ascending or descending application on the amount that goes towards repayment of your loan from your salary.
Banks or financial institutions that are especially specialized in housing finance have loan products that allow this facility. These may be known as "flexible installment plans" or similar names.
The decision to adopt these kinds of plans will depend on the amount of the loan and your near or long-term financial needs. In case you need money in the immediate future for other debt obligations, you choose the increase in EMI option. This method will also accommodate the general expectation of a gradual rise in one's salary.
However, you need to also think of the larger expenses that could arise in your middle age and older years, making home loan repayment burdensome. Also, it may not come with a moratorium period.
On the other hand, decreasing one's EMI will mean higher payout in the initial years. The benefit of the method is that in the initial months of a loan's tenure, the interest outgo is higher in the EMI.
By paying higher EMI, you will be able to pay off the interest and a part of the principal faster. Additionally, as the EMI burden lowers, you can even think of making pre-payments towards the loan (with payouts on other investments) to clear the loan faster than earlier planned.
3. Linking home loan with savings bank account
Some banks allow linking the home loan with a saving bank account that will be opened at the same time. The facility will allow the borrower to deposit his/her savings in the linked bank account to make the interest liability to the extent of surplus parked in the account, helping the borrower reduce his/her overall interest burden.
Any credit available in the linked savings bank account at the end of the day will be accounted for by the bank and accordingly, the interest amount on the loan will be reduced to the extent of daily outstanding credit balance in the savings account.
Note that this account will not earn interest like a regular savings account, however, other facilities like ATM card, cheque book, net banking, etc should be available.